What can you do to improve your investment return by 1%? Very little, according to a recent Moneyweb article, which goes on to say that no matter how much homework you do, no advisor or fund manager can guarantee you that extra slice of performance. Therefore, the article urges, investors should rather focus on what they can control, which is how much they save and for how long.

We agree, but only up to a point. Investors can never be sure how their fund manager will perform. Past returns do not guarantee future results, and no study has yet found a way to identify future winners. So there is no doubt that choosing a fund manager is a bit of a gamble.

But one aspect about future return is known, and that is the extent to which it will be reduced by fees. Investors can improve their return by 1% pa (or more), simply by paying 1% pa less in fees.

In the absence of any real negotiating power with service providers this requires investors to make a choice: either go for the traditional high-touch model based on brokers and fund managers, or a low-touch model relying on automated advice and index funds.

The underlying fee differential provides the proper context to evaluate these two approaches. The ‘active versus passive’ debate tends to get bogged down in emotional and theoretical arguments when, ultimately, the most important point is: Which fee structure is more likely to secure an adequate return for retirement savers?

As a long-term investor you should focus on what is probable rather than what is possible. Yes, you can beat the market averages with an active strategy, but probably, you won’t. The risk is that you do much worse, and miss your savings goal, to retire in relative comfort.

With an active approach, it doesn’t take much to do a lot worse. And whereas you may have gotten away with sub-optimal returns in the past, you may not do so in future.

To explain why, the table below summarises the typical pay-off for high-touch and low-touch investors in the share market. Both groups earn the same long-term real (after-inflation) return of 7%. The former pays an all-in-cost of 2% pa, the latter 0.75% pa.

This means that low-touch investors take home 6,25%, but high-touch investors only 5%. Collectively, they have already lost, simply by paying higher fees.

Fig 1: High-touch versus low-touch: probable equity returns

Source: 10X Investments

That’s just the tip of the iceberg, though. Empirically, as an active investor you have roughly a 20% chance of earning an above-average return (say 9%) over the long term. But that comes with a catch: the more the ‘winners’ take, the less the ‘losers’ get. To reconcile back to the average market return of 7%, the remaining 80% of the active group can earn only 6,5%.

Net of fees, the ‘winners’ get 7% (0,75% more than ‘passive’ investors). The ‘losers’ earn 4,5% (1,75% less than ‘passive’ investors).

You’ll notice that the pay-off profile in this gamble is highly skewed. The upside reward (0,75%) is lower than the downside loss (1,75%). And the chance of losing is four times higher than the chance of winning. No self-respecting gambler would take this bet, yet it’s the standard active investment model.

This pay-off profile should alert any retirement saver pursuing a minimum goal, say a final income replacement ratio of 60%. This goal is easily achievable if you save 15% of your income for 40 years, and you earn a net real return of at least 3% pa.The long-term gross return on a Regulation 28-compliant balanced high (75%) equity portfolio has historically been around 6% pa.

Assuming the same fees as before, a low-touch investor could expect a net return of 5.25%, presenting a considerable margin of safety. While the active group still earned 4%, 80% would receive only 3,5% on average, barely above the required rate of return.

Of course, the ‘average, historical’ market return is not guaranteed. Based on 100-year data there’s a one-in-five chance that the 40-year ‘real’ equity market return will be as low as 4,5% pa.

We could be facing one of those times. For a myriad of structural and economic reasons, the prospect that future equity returns will be lower than before is very real. Many market commentators expect no more than 4%, but let’s assume it’s 5%. All else equal, this would depress the overall return of our high-equity portfolio to 4,5% pa.

Earning 4,5% pa before fees would still suffice for low-touch investors; however, the average high-touch return drops to 2,5% pa; 80% stand to earn just 2%.

By paying high fees in a low return environment, the great majority of ‘active’ investors have virtually no chance of getting anywhere near a comfortable retirement, unless they up their savings rate considerably.

Given these probabilities, which is the rational approach? Is it the one that gives you (saving at the required rate for the required time) a high chance of meeting your goal, with a margin of error? Or is the one that is likely to succeed only 20% of the time, but will badly ‘fail’ the majority of investors?

Ultimately, it is in this context – high cost versus low cost, probable outcomes versus possible outcomes – that we should hold the ‘active versus passive’ debate. And here, too, we find that there is not much room for debate. The numbers and the probability-adjusted outcomes speak for themselves.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X assumes a total fee of 1% including VAT per annum and that the client comes directly to 10X (i.e. no advisor fee). This is the maximum investment fee charged by 10X.

The calculator assumes the you save 10% of the salary you input and that this grows annually in line with inflation.

The investment term and savings period is assumed to be from your current age to age 65, unless you are over 55. If you are over 55 the investment term is assumed to be 20 years.

Your projected investment value is shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections are based on the 10X High Equity portfolio, which is designed for investors with an investment term of 5 years and longer. The portfolio may be highly volatile over shorter periods.

The projections do not account for tax in any way.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X is assumed to charge a fee according to the 10X Living Annuity scale. The maximum fee in this scale is 0.86% including VAT per annum.

Your projected income and investment value are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected income in the first year will be equal to your desired income provided your annual income is between the regulatory limits of 2.5% and 17.5% of your investment value. Each year your projected income will keep pace with inflation, provided that it falls within these regulatory limits. The number of years that your projected income is able to keep pace with inflation without exceeding the regulatory cap of 17.5% is displayed on the outputs.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. These returns are based on the portfolio you selected (defaulted to 10X High Equity if your term exceeds 5 year). Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

Note that the 10X Living Annuity is underwritten by Guardrisk Life Limited (FSP No. 76).

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act. The 10X Living Annuity is underwritten by Guardrisk Life Limited (FSP No.76).

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X is assumed to charge a fee according to the 10X Investment fee scale and that the client comes directly to 10X (i.e. no advisor fee). The maximum fee charged by 10X in these scales is 1.04% including VAT per annum.

Your projected benefits are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected benefits are shown at age 65, unless you have changed the retirement age on the output page.

Where applicable, the projected monthly income assumes that you purchase an inflation-linked guaranteed annuity at retirement with your projected investment value. This estimate assumes that you use your entire projected investment value to purchase an annuity at retirement. Our estimate is based on the recent price of an inflation-linked guaranteed annuity without a spouse. An inflation-linked guaranteed annuity will provide you with an income that grows annually with inflation and pays you an income for the remainder of your life.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

The projections above are based on the default investment strategy called the 10X default glide path, unless you changed the investment portfolio on the output page . The 10X default glide path automatically matches the investment portfolio’s asset allocation to your assumed retirement age. This ensures that when you are more than five years from retirement that you mainly own assets that are expected to deliver high returns - with expected higher volatility of returns - and that the portfolio will gradually be switched into less volatile assets - with expected lower returns - in the last five years before you retire, with the aim of preserving capital.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.

10X calculator assumptions & disclaimers

Fees are the only difference between the “Industry” and 10X projections.

The fees used in the projections are inclusive of VAT. The investment referred to as “Industry” is assumed to charge total fees of 3% including VAT per annum. Morningstar’s Global Fund Investor Experience 2015 study shows that the average total expense ratio is 1.63% pa (which includes investment and performance fees), with the cost of advice and an administration platform adding an additional 1% to 1.5% pa. The investment with 10X assumes a total fee of 0.57% including VAT per annum and that the client comes directly to 10X (i.e. no advisor fee).

Your projected benefits are shown in real terms (today's money). This means we have shown what future values would be worth today, once we have stripped out inflation.

The projected average and poor investment returns are based on historic market returns after inflation from 1900 to 2017. Historically over your savings period, one in four outcomes have been worse than the outcome shown under poor returns and three in four have been better. The projections therefore account for historical market fluctuations.

Your projected monthly income (if applicable), grows in line with inflation until your money is depleted.

The projections are based on the 10X High Equity portfolio, which is designed for investors with an investment term of 5 years and longer. The portfolio may be highly volatile over shorter periods.

The projections do not account for tax in any way.

The projections shown are based on information provided by you regarding your financial situation. 10X Investments does not in any way guarantee the projected benefits shown; we offer these projections merely to assist you in your financial planning. Although our projections take account of the historical returns earned in the South African and International markets, future market returns are uncertain. Past performance does not guarantee nor indicate future results.

The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

10X Investments is a licensed Financial Services Provider #28250 and S13B Funds Administrator #24/444. The information on our website does not constitute advice as defined by the FAIS Act.